Federal Reserve Chairman Jerome Powell says the central bank is looking into issuing a digital dollar with a “very broad scope.”
Powell gave an update on the digital dollar on Tuesday during a panel discussion on digital finance. “Cash is not disappearing here in the United States. We still use cash quite a lot,” he said. He did add that “It is declining, not in absolute terms but compared to non-cash payments, it’s declining.”
He went on to say that the central bank is weighing the potential costs and benefits of issuing digital currency in the United States. He did clarify that “We have not decided to proceed and we don’t see ourselves making that decision for some time.”
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Powell did say that if they were to begin work on digital currency, they would do so in collaboration with Congress and the executive branch. He says that these two governing bodies offer expertise to many of the issues they will be dealing with. He also made it clear that the central bank would need to get approval from both Congress and the executive branch to move forward with developing and issuing digital currency.
What Does a World With Digital Currency Look Like?
Digital money has been in development for some time by technology companies. The goal is to democratize finance and increase access to financial products and services. The overarching goal is to reach a point where domestic and cross-border payments are much cheaper and instantaneous.
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Regulation Is Key
Regulation is key in a global development such as this, but it will be a long and difficult road. All national authorities would need to agree on regulatory frameworks, and regulations would need to ultimately be coordinated to bring order to the markets.
The central banks are also obviously working on creating a digital currency. Most crucial in developmental planning will be figuring out how to capture and hold onto consumer trust. Cybersecurity risks will always be a concern, but the hope is that the central banks will design the currency responsibly and with customers and their privacy in mind.
Benefits of Digital Currency
- Support for those who are unbanked or underbanked. More than 7 million American households do not have a bank account. Because they don’t have bank accounts, they are forced to pay fees when they cash their paychecks and send payments with money orders. With digital currency, people could send and receive money without the extra fees.
- 24/7 banking access. Most existing money transfers take days to go through, especially on the weekends because banks are closed and cannot confirm transfers. Using digital currency would mean that transactions would work at the same speed every day of the week.
- Faster payments. Digital currency would make it much faster to send payments than current means such as wire transfers and ACH. These methods can take days for the financial institutions to confirm transactions.
Drawbacks of Digital Currency
- There are too many currencies at the moment. Cryptocurrency has become so popular lately that there are just too many different forms of digital currency being created over different blockchains. It would take time to consolidate them or determine which ones will be best for which uses.
- Blockchain transactions can get pricey. When using the blockchain, computers must solve complex equations in order to process and verify transactions. This process takes a considerable amount of electricity, which becomes more expensive the more transactions there are.
- Development will take time and tax dollars. If the central bank decides to go ahead with creating a digital currency, it will take time to develop and there will be costs associated that will likely be taken from American tax dollars.
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